Medical Action Industries Inc. F4Q10 (Qtr End 03/31/2010) Earnings Call Transcript

Jun. 2.10 | About: Medical Action (MDCI)

Medical Action Industries Inc. (NASDAQ:MDCI)

F4Q10 (Qtr End 03/31/2010) Earnings Call

June 2, 2010 10:00 AM ET

Executives

Charles Kelly – Chief Financial Officer

Paul Meringolo – President and CEO

Analysts

Larry Solow – CJS Securities

Matt Dolan – Roth Capital Partners

Mitra Ramgopal – Sidoti & Company

Steve Friedman – Wells Fargo Advisors

Gerry Heffernan – Lord Abbett

Operator

Good morning. My name Salina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year End Earnings Call for Fiscal 2010. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

I will now turn the conference call over to Mr. Charles Kelly, Chief Financial Officer. Please go ahead, sir.

Charles Kelly

Thank you, Salina. Good morning and thank you for holding. With me on this call is Paul D. Meringolo, CEO and President of Medical Action. The primary purpose of this call is to discuss our results for the three and 12 months ended March 31, 2010, which were released this morning.

As you know, we must first touch all the bases by noting both our commentary and responses to your questions may include forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties discussed in detail in our annual report on Form 10-K and annual report to stockholders and our quarterly reports on Form 10-Q, all of which have been filed with the Securities and Exchange Commission. The company’s actual results could differ materially from those projected or assumed in these forward-looking statements.

It is now my pleasure to introduce Paul Meringolo.

Paul Meringolo

Thanks, Chuck. Good morning and thank you for being here today. I assume you've all had a chance to read our press release. We would like to report that net sales for the three months ended March 31, 2010, totaled $71, 223,000, a decrease of $1, 633,000 or 2% versus the $72, 856,000 in net sales reported for the three months ended March 31, 2009.

Net income for the fourth quarter of fiscal 2010 was $5,194,000 or $0.31 per basic and $0.30 per diluted share, which has significantly improved upon the net income of $1,772,000 or $0.11 per basic and diluted share reported in the prior year period.

Net sales for the 12 months ended March 31, 2010 were $290,146,000, a decline of $5,924,000, or 2%, versus the $296,070,000 reported for the 12 months ended March 31, 2009.

Net income for fiscal 2010 was $16,841,000, or $1.04 per basic and $1.03 per diluted share, which compares favorably to the $4,955,000, or $0.31 per basic and diluted share earning -- earned during the prior -- our prior fiscal year.

Net income for the 12 months ended March 31, 2010, was a record for Medical Action Industries.

Many of the internal challenges that we have discussed with you over the past two years have been brought under control. While we will always be impacted by volatility in global commodity prices particularly oil, resin and current base products, we have benefited from a combination of forward resin purchases made last year and relative stability and our other commodity cost during fiscal 2010.

We have eliminated the underlying causes of production inefficiencies in our Galloway, Tennessee injection molding facility and are no longer affected by persistent back order issues.

The cost of products sourced from China have stabilized and we have discussed with you throughout the year, we have benefited from our decision to make advanced purchases of approximately 50% of our resin requirements in March of 2009, which has partially protected us from the rise in the resin costs during fiscal year 2010.

As a result of our actions to successfully manage through these challenges the company is able to report record earnings for the year ended March 31, 2010. In addition to our record earnings, cash generated from operating activities increased $40,206,000 to $43,268,000. We use this cash to reduce debt by $41,811,000 from $60,046,000 down to $18,235,000 at the close of the fiscal year.

We have successfully overcome the operational challenges that demanded most of our attention during the past two years. We have refocused our efforts internally to improve our sales and marketing activities across our many product lines.

We continue to maintain our commitment with our back-to-basic approach by defining our core values, excellence, responsibility, innovation, community and growth in revenues, profit and market share.

We are aware that we need to do a better job with revenues. As we mentioned last quarter we are working to repair and strengthen our existing customer relationships. We believe that there is opportunity to add value to our customers sourcing of our products by assisting them in managing costs and improving efficiencies in the use of our products.

We have an opportunity to leverage our core values and long time position as a provider of high quality products and cost effective solutions with exceptional customer service and a continued focus on building stronger relationships with our customers.

We have recently retained Harriet Overbeck, a seasoned industry executive as Vice President of our Executive Health Services team. Harriet and her team of area Vice Presidents will focus on relations with [Street Suite] executives in GPO’s and IDM’s and will coordinate the efforts of our sales force, marketing teams and operations group to provide an integrated process to support our customer base.

We will be announcing in the next few days that the company has successfully renegotiated its largest GPO contract as a sole source provider of patient bedside utensils to one of the largest GPO organizations in the country. Additionally, we have renewed another GPO contract in which we successfully move from a dual source position to a sole source position for the supply of patient bedside utensils to another national GPO organization.

Over the next few quarters we will continue to adjust our structure within our sales operations group to deliver long-term organic growth across our product lines. We are committed to demonstrating to our customers that Medical Action is committed to being the trusted partner of choice to deliver innovative solutions to the healthcare community for the purpose of improving quality care and enhancing the patient experience.

I'd like to thank you for participating in our call today and we look forward to future calls to discuss our progress. Salina, with that, I'd like to open up the floor to any questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Larry Solow of CJS Securities.

Larry Solow – CJS Securities

Hi. Good morning.

Paul Meringolo

Good morning, Larry.

Larry Solow – CJS Securities

Paul, I know last couple quarters you indicated not to get your crystal ball out, but I know you sort of had, thought that maybe you were going to be reaching a point where turning point or inflection point in some of your reenergize sales focus and you thought, you might start seeing growth over the next couple quarters. Any additional color you can add to that or anymore color just on the outlook in general?

Paul Meringolo

Well, again, I'm excited about the changes that we've made and continue to make, and I think that, the organization is continuing to get better and continuing to jump. So, I think it's taking a little bit longer than I had anticipated but I still think we're making a -- we’re going to make forward progress in a much quicker pace over the next couple of quarters.

Larry Solow – CJS Securities

Okay. And then some of the new renegotiated contract, is that, are those rates similar to where they've been, did you have to take any price concessions on that?

Paul Meringolo

There were some small price concessions, but again, they were big chunks of business that were at jeopardy of being a dual source…

Larry Solow – CJS Securities

Right.

Paul Meringolo

… so we're pleased that our customers had confidence in us, especially after the wave of some of these challenges we had on the service side and I don't think we could have gotten that fix quick enough and we did, and we were able to renegotiate those contracts. So we're pleased about that.

Larry Solow – CJS Securities

And then the other one, I guess, the dual source going to a sole source, so I guess, that gives you an opportunity maybe to take a little share on that piece of the business?

Paul Meringolo

There is some upside there. That's true.

Larry Solow – CJS Securities

Okay. And then in terms of the resin, I know you forward contracted and you basically had 50% of your supply locked in for last fiscal year. Going forward now, I guess, you're going to be most anticipating in the spot market?

Paul Meringolo

I'll let Chuck to answer that. Chuck?

Charles Kelly

Well, we've just used up the last of the polypropylene that we bought last March during May.

Larry Solow – CJS Securities

Okay.

Charles Kelly

And we've been filling in the gaps with spot market buys and we're negotiating now with one of the larger resin suppliers to lock in prices and we're negotiating the pricing now to set a max level for fiscal 2011.

Larry Solow – CJS Securities

So it will be a little bit more of a moving target but still some lock in?

Charles Kelly

Yeah. We don't principally play in the spot market. We used the spot market to set pricing with prime vendors.

Larry Solow – CJS Securities

Right.

Charles Kelly

They tend to have better quality and better delivery processing.

Larry Solow – CJS Securities

And I guess just prices had run up a lot, had been running up and I guess over the last couple of months things have at least calmed down a little bit and still above last years level but coming back a little bit?

Charles Kelly

You need to be sensitive to the fact that just because of the volatility and the price of the barrel of oil doesn't translate directly to a pound of resin.

Larry Solow – CJS Securities

Right. I know it has got its own market characteristics and then just last question on SG&A, I know it came down a good amount and I know it does move around a little bit on a quarter-to-quarter basis.

Anyway, is this number a little bit artificially low or do you think assuming sales obviously there's some sales commissions and sales go higher but assuming sales were around this low 70s run rate, do you expect SG&A to hang below $10 million per quarter?

Charles Kelly

No. We always said SG&As will run about $10 million a quarter, probably not go below it and not go much higher than that.

Larry Solow – CJS Securities

Got it. Great. Okay. Thank you.

Operator

Your next question comes from Matt Dolan of Roth Capital Partners.

Matt Dolan – Roth Capital Partners

Good morning, Paul and Chuck.

Charles Kelly

Good morning.

Paul Meringolo

Good morning.

Matt Dolan – Roth Capital Partners

A follow-up on the revenue side, Paul, can you tell us what specifically lead to the decline and just to be clear, do you expect to start to see growth going forward from the June quarter on?

Paul Meringolo

Yeah. I think a couple of things. Number one, I think the nagging service level issues that we had over a prolonged period of time didn't help us. So we probably lost a couple of pieces of business in that piece. And I've got to tell you, it could have been a lot worse, so I'm actually surprised it wasn't worse but it was. And so I think that's behind us now and so some of the ones that we lost we're going to go back and get, number one.

Number two, I think that we've gone through some volatility from an organizational standpoint in a lot of changes that we've made. So I think from an execution standpoint we have probably missed and again I don't think this is a reflection of what's going on over the last 30 or 60 days, it's probably more about what's going on over the last 180 days that’s impacting sales today.

So I think we're well on our way to getting the field right and all the pieces that we continue to add like Harriet's Group and those AVPs are going to and the regional Manager changes that we've made and some of the field changes that are happening and some of the tools that we're providing them will help them be more efficient from a sales standpoint.

And I also think there has been and again you know me, Matt, I never like to blame it on outside pieces but more I'm out in the field, the more I realize that there has been some slight decline from a hospital side and demand. And so having said that I don't believe going forward that would be an issue if we're chugging on all cylinders both operationally and from a sales process standpoint.

Matt Dolan – Roth Capital Partners

Okay. That's helpful. And on the gross margin side of things, a lot of moving parts there, it sounds like Tennessee and China are stable, resin, you'll manage as best you can. Is this level, sort of, the high end of the range or is this something we should build off going forward?

Paul Meringolo

We're going to experience some downward pressure on gross margin because of the resin pricing.

Matt Dolan – Roth Capital Partners

And that will flow through into China as well. Resin goes up so will China.

Paul Meringolo

Exactly but we've got some opportunities in Tennessee while we've stabilized it we haven't started improving. And so there is upside opportunity there, it's not going to offset the full impact the resin, that's for certain. And there's also the velocity of what goes through the factories that we need to consider as sale.

As we start to build sales, we're going to get better absorption in our fixed costs and the factories which will contribute the gross margin so you're right. There are a couple of moving parts in there but other than the price of resin, we think that they are moving forward.

Matt Dolan – Roth Capital Partners

Right. But it should get down is what you're implying from the March quarter?

Paul Meringolo

Yes.

Charles Kelly

And we talked about -- and Matt, we've talked about that for the last couple quarters. When we anticipated pressure from a cost standpoint going forward, now today, it seems like maybe the pressure will not be as bad as we anticipated but still going to be much different than what it was for the last 12 months. And until we've got our house 100% in order, we're really not going to go to the marketplace for any increased prices that are material.

Matt Dolan – Roth Capital Partners

Okay. And then finally, the debt pay down was impressive last fiscal year. Maybe talk about now your acquisition strategy, what size are you comfortable making and is this something we should expect to see in the next couple of months?

Charles Kelly

Matt, again, I think that it's always been our focus is to get the debt paid down, get the balance sheet really strong. I don't think anybody could take our balance sheet from any aspect you look at it. I think it's a fairly robust balance sheet and we have been very active in looking and talking from an acquisition front.

Again, you know the way we are. When we find the transaction that fits and depending on all of the characteristics of that transaction, we'll determine the timing. And so I'm not going to say it’s been -- we could have a transaction that could close in 60 days or one that could be six months. I think what we'll do is be diligent, number one, in finding the right transaction that fits.

Number two, doing proper due diligence and transition planning and then when it's ready we'll announce. But as you can see, we have repositioned ourself financially that we could pull the trigger on, on a significant size transaction.

Matt Dolan – Roth Capital Partners

Again the first part of that question was what size are you comfortable making?

Charles Kelly

Matt, I’m not going to pigeon hole it, anyone that makes sense from a debt standpoint and from a market potential. If they have a good strong infrastructure, it could be larger than we have seen in the past. If they don't, it could be smaller than we've seen in the past. It all depends on the makeup of the organization that we're looking to acquire.

Matt Dolan – Roth Capital Partners

Okay. Thanks guys.

Operator

Your next question comes from Mitra Ramgopal from Sidoti & Company.

Mitra Ramgopal – Sidoti & Company

Yes, hi, good morning guys. If you could just look at the gross margin in the fourth quarter, the uptick we saw from the third quarter, you mentioned a lot of moving parts, resin, China, Galloway working off the backlog, et cetera, what would you say was sort of like the biggest contributors to the improvement?

Paul Meringolo

We had a mix in the change of products that we sold during the fourth quarter. Right, and we've had a little bit of improvement in the throughput through Tennessee. Those are the two biggest movers from Q4 to Q3.

Mitra Ramgopal – Sidoti & Company

Okay. And as we look at fiscal 2011, would you say you still have a lot more to expect out of Gallaway or you've pretty much captured most of it?

Paul Meringolo

I think it's safe to say that we've stabilized it and we've had nominal improvement. I think that there is, we have yet to achieve the opportunity that existed when we acquired the company back in 2006.

And as we said in earlier calls, it's our intent to go back and get that, right. We -- whether it takes us one quarter or eight quarters, the business plan contemplates that there will be steady improvement in the operations in Tennessee.

Charles Kelly

Yeah. The most support things, Mitra, is that the leadership down there is the right mix and Ralph is continuing to make upgrades to his organization and challenge and focus them.

So for the first time, I believe that that organization is ready for sales and marketing to challenge them with increased volume. We search really -- we have an engine down there and right now we're not utilizing it as best we can and so we're going to have to drive some volume through that existing cost structure so that we continue to leverage that and the capabilities that we have there. So I think that's when they will really shine.

I also think from a development standpoint, we've looked at a number of different variations of changes to a product line that hasn't been changed for many, many years. Upgrades and some of the features our end-users are asking for. We’ve got now a team down there that have the ability to make those some of those changes and developments reality. So there's a lot of pieces to the puzzle that is additive to what Ralph and their team is bringing to the table from an overall company perspective.

Mitra Ramgopal – Sidoti & Company

Okay. That leads me to my next question. Again, as you said, you've made a number of changes over the past year in terms of investing in equipment, personnel, et cetera. Would you say now that’s you've accomplished most of what you wanted to in 2011 is going to be really just trying to see more make that investment pay off?

Paul Meringolo

That's probably a fair statement, Mitra, but I will say that a lot of times, you make changes for the right reasons and in the midst of it, you realize that some of them aren't working and so we're not going to be stagnant. We are going to continue to tweak the company and the organization to continue to move forward faster than we have in the past couple years from a revenue standpoint.

So I think we are almost there from the changes we've made in that organization. I don't see anything that's as drastic as we've seen over the last 12 months and I think that it's going to be a year we're going to drive for some stability in the organization to drive the principals that we put in place in that. So I just want to make sure if it's not working that we will continue to make changes as we see fit.

Mitra Ramgopal – Sidoti & Company

Okay. Thanks. And then again kind of just going back to resin as you mentioned, it's going to be increasing and there's not a lot you can really do about it, but one thing I did hear was potential price increases. Is that not an option?

Paul Meringolo

In the short-term, Mitra, I don't believe it is. I don't believe in the short-term next three, six, nine months. I don't think we'll go and institute a price increase today.

Mitra Ramgopal – Sidoti & Company

Okay. And finally, Chuck, I don't know if you have the number for the CapEx for the year and what we should expect for next year.

Charles Kelly

I don't have the exact number for this year but it was over 5 million. Obviously, we're going to have significant reductions in our debt just from the straight amortization so we're pretty much removed from the burden of CapEx limitation but we've moved from the position of buy, I think expending CapEx to sure up the operations to having economic paybacks on every expenditure we make now. So we're planning on spending 4 million plus in CapEx but it had to contribute to the margins improvement of the business rather than stabilizing the business.

Mitra Ramgopal – Sidoti & Company

Okay. And finally also the tax rate, I know it's off a little in the fourth quarter if we have to look at a more normalized rate, 40%, that will be for the rate?

Charles Kelly

Well, the accounting regs only let us change the tax rate at the end of the year, that's why it was trued up in the fourth quarter. And if you look at the annual tax rate, that's what it should be for next year.

Mitra Ramgopal – Sidoti & Company

Okay. Okay. Thanks again guys.

Paul Meringolo

Okay.

Operator

Your next question comes from Steve Friedman of Wells Fargo Advisors.

Steve Friedman – Wells Fargo Advisors

Good morning, Paul and Chuck. Congratulations on a fine quarter.

Paul Meringolo

Thank you.

Steve Friedman – Wells Fargo Advisors

One of my questions, Paul, I think you pretty much answered and that was regarding the acquisitions, pretty much your usual metrics and criteria for acquisition and that, if I understand correctly you're financially in the position to make an acquisition if it's right for the company that could be as big as we imagine. Would that be a fair statement?

Paul Meringolo

Yes.

Steve Friedman – Wells Fargo Advisors

Okay. Could you clarify one thing for me? Right at the initial -- beginning of your initial comments, you talked about an announcement in a few days you are going to have about becoming a sole source versus a dual source with a good size GPO contract.

Paul Meringolo

Yes.

Steve Friedman – Wells Fargo Advisors

And would that logically fall being a single source, will be in addition to the revenues?

Paul Meringolo

That is correct.

Steve Friedman – Wells Fargo Advisors

Okay.

Paul Meringolo

That's what we're driving for. It doesn't automatically come.

Steve Friedman – Wells Fargo Advisors

Right, but…

Paul Meringolo

But again, the reason why I make those points, Steve?

Steve Friedman – Wells Fargo Advisors

Yes.

Paul Meringolo

I want to reconfirm that from especially on the patient utensils and bedside products that plastics business that we have had challenges on the service side and that behind us and now our customers are starting to show their confidence in our ability to drive that business forward. So both GPOs have made a commitment to sole source. One of them actually going from a dual to a sole which I think is big.

Steve Friedman – Wells Fargo Advisors

Okay. That sounds great. Just one further thing, looks like the margin if I see it correctly for the year increased – looks like from about 17.2% up to 23.75%. Again, I'm sure part of that is due to your efficiencies at your new plant but some of your good purchasing, forward purchasing of resin prices. Would you be comfortable seeing a gross margin for the year with a mix somewhere in the 23% range?

Charles Kelly

No. We've already foreshadowed the issue with resin – is going to be a drag on the gross margin. We run it 23.7 for the year, so it's certainly going to be below that.

Paul Meringolo

Well, if your question is would we be comfortable running at 23.7 or greater, yes, Steve. Are we going to drive to that? Yes. Do we think that's going to be doable in short to medium term? Probably not and we've been talking about that for a number of quarters now.

Steve Friedman – Wells Fargo Securities

Right. But you would think or would it be a fair statement to say that you could surpass the 17% gross margin that you recorded for 2009?

Charles Kelly

Yes.

Steve Friedman – Wells Fargo Securities

Okay. That's all I have. Congrats again on a great quarter.

Paul Meringolo

Thanks, Steve.

Steve Friedman – Wells Fargo Securities

Okay.

Operator

There is a follow-up question from Larry Solow of CJS Securities. Excuse me.

Larry Solow – CJS Securities

Just a quick follow-up on the mix issue. I know you guys, during the year you had gotten out of a couple contracts I think with crutches and what not so some unprofitable type products. Has that helped your mix at all in this quarter or was it just a random mix type issue?

Paul Meringolo

No. Just random mix, the stuff with the crutches was on its way out normally. We just moved in some more kits and trades in relationship to the other parts of the business.

Larry Solow – CJS Securities

And again it's a more of a random thing, so hard to predict when it's going to be going forward, I imagine?

Paul Meringolo

Yeah. It's too volatile. We'll nail it down for you.

Larry Solow – CJS Securities

Got it. Okay. That's it. Great. Thanks. Actually, one more quickly, have you seen any change in – hospital volumes were obviously down last 12-18 months. Have you seen any noticeable change? I know hospitals seem to be at least, stable their budgets and stable their financial situations – it seems to be stabilizing and anecdotally volumes have picked up a little bit. Have you guys noticed anything or any comment on that?

Paul Meringolo

What I'm hearing from the marketplace especially on a distribution side is that March and April were liked.

Larry Solow – CJS Securities

All right. So no real noticeable change, essentially?

Paul Meringolo

Yes.

Larry Solow – CJS Securities

Okay. Great. Thanks.

Operator

There is a question from Gerry Heffernan of Lord Abbett.

Gerry Heffernan – Lord Abbett

Hey, good morning, guys. And thank you very much for some real nice results here.

Paul Meringolo

Thanks Gerry.

Charles Kelly

Hi, Gerry.

Paul Meringolo

Chuck, I guess this is for you. I'd like to go back to the gross margin question. So you commented that for the year it was 23.7.

Charles Kelly

Right.

Gerry Heffernan – Lord Abbett

Though it was 24.6 for the quarter and this quarter was not the highest sales point that you've had, so it's not like we're doing that on, we certainly had higher sales in the previous quarter.

So I guess to – trying to understand where the business is as of right now that seems like you're expecting a pretty big hit from the resin, particularly, when as resin prices have gone up you have felt part of that through the years because you haven't had 100% of resin prices bought for you, at only 50% protected if I understand everything correctly.

Charles Kelly

That's correct.

Gerry Heffernan – Lord Abbett

And the resin that you had purchased at a attractive price, was that utilized through the year equally or did that kind of run-off? So did we actually have 50% of the most recent quarters, resin price reflected at the forward purchase amount and 50% at spot or how did it work out throughout the year?

Charles Kelly

It was used fairly ratably throughout the year.

Gerry Heffernan – Lord Abbett

Okay. And did that come to an absolute end at the end of March?

Charles Kelly

No. We were able to use the resins and stretch it out into May.

Gerry Heffernan – Lord Abbett

Okay.

Charles Kelly

Benefit to, it in the first quarter.

Gerry Heffernan – Lord Abbett

Okay. So the sequential increase in the gross margin from third quarter to fourth quarter or through the year, a lot of that is showing the improvement in Gallaway and the improvement in the product being sold that is sourced from China. Is that correct?

Charles Kelly

Yeah. It's more weighted to the mix of products sold during the quarter. It was a benefit from Tennessee as well. Keep in mind also that if on the resin side I don't have this information readily available, but to the extent that we sold more Polypro products than polyethylene products in the fourth quarter that mix would have contributed as well.

Gerry Heffernan – Lord Abbett

Okay. But, I know you have a very large skew count and so this is going to work itself out over the course of the year, though?

Charles Kelly

Absolutely. Your first question with regards to our forecasted decline in margins and when I answered, yes, it was the fact that we bought resin and resin prices went up and as you know, we do not give a lot of granularity as to what our projected margin levels are going to be.

Gerry Heffernan – Lord Abbett

Really, I hadn't noticed that?

Charles Kelly

So the message that we're trying to deliver is there is going to be downward pressure. It's not going to be returning to the levels that we experienced back in 2009.

Gerry Heffernan – Lord Abbett

Right.

Charles Kelly

And there is some benefit, operationally that's going to be contributing to the business.

Gerry Heffernan – Lord Abbett

Great. And then help us understand, what the new contract signings with these two GP Os? And, Paul, I guess I should direct this to you because if I recall within the last 12 months, certainly not in this most recent call but in the last 12 months, we had a crash in oil prices and oil prices moved up rapidly and I believe on these calls you had made it statement, look, we really had not caught up to oil prices when they are moving up.

The fact they are back up at 80 it doesn't mean we're caught up and we're still out there trying to get price based upon just and look our costs went up. It seems that you've pulled away from that somewhat. Am I reading that way and what is it now by saying you know what? I have to take it easy there.

Paul Meringolo

Because I think there is an opportunity for us to have a better financial package to our customer and not just plastics alone. And so I think what we've done is what we have to rebuild is our relationship in some of those areas where we really drop the ball from a service side and I don't take that lightly, Gerry, and I think raising prices in the middle of having severe service interruption was probably a bad thing from a customer relationship standpoint.

Gerry Heffernan – Lord Abbett

Okay.

Paul Meringolo

So what I'm really trying to do is I'm not saying that we're not going to raise prices, because again I think our customers want a steady source of supply with a company that's cash flowing appropriately and has the ability to buy inventory and have inventory to service them.

So I'm not saying that we're not going to entertain the thought of that. I'm just -- I'm a little less aggressive when it comes to raising prices when resin goes up, because as we've seen it went up and came back down. I'm just -- I'm not as aggressive as we were back when.

Gerry Heffernan – Lord Abbett

Okay.

Paul Meringolo

I just want to be care -- I want to be careful with that. And I want my customers to understand, I know they are going through tough times and I think we've got to come up with a number of different solutions that help them manage their overall cost and it's not just taking an approach of plastics. It's taking an approach of a combined look at all of the products that we sell and putting a program together that will help them manage their overall cost across the entire product line.

Gerry Heffernan – Lord Abbett

Okay. In regards to the new contracts that you've signed here these two GPOs, I understand that you seem to be putting forth a message that we had to price appropriately to make sure we -- to win the business as a volume aspect here that has an offset. How long are those agreements for and is there any price escalation in the agreements over time?

Paul Meringolo

Well, we make the big one is that to various three years.

Gerry Heffernan – Lord Abbett

Okay.

Paul Meringolo

And there is a resin one in that that I believe is triggered after 12 or 18 months.

Gerry Heffernan – Lord Abbett

Okay. And when you say the big one, I imagine that's the one where you're going from a current dual source to a sole source?

Paul Meringolo

No. The big one is going from a sole source to a dual source.

Gerry Heffernan – Lord Abbett

Okay. My mistake. And then one last topic that we haven't touched upon on in this call is from your move to your new environment and the SAP system. How is everything going with the SAP system and to what extent is this new enterprise system giving you additional information that's helping you guys run the business? What are you finding out using this new system? What's a return on this capital expense?

Paul Meringolo

Well, the systems fully deployed throughout all aspects of the company.

Gerry Heffernan – Lord Abbett

Marketing also?

Paul Meringolo

I'm sorry?

Gerry Heffernan – Lord Abbett

Marketing also?

Paul Meringolo

Yes.

Gerry Heffernan – Lord Abbett

Okay.

Paul Meringolo

We -- over the past year, we ramped it out through all of our production facilities and we have significant efforts going on right now for data mining projects within the sale ups, sales area and marketing, right.

As a matter of fact, I would say that, a full 50% to 75% of our IT resources are working on revenue related matters. It's tough to put a dollar value on the return. It is our information technology system and it's scalable for us in the future and it's delivering the value that we expected to deliver when we first went with it.

Gerry Heffernan – Lord Abbett

Okay.

Charles Kelly

So bottom line we're excited about all of the work that we've done over these many years and we're expecting some really good tools. We have experience and we're going to expect some additional tools that we're working on right now to be deployed to the sales force as we speak, we're excited about it.

We're also, Gerry, we're also done a lot of work in acquiring information about our markets and competitors and size and growth opportunities that we've really are integrating with our internal data to make sure that we're focused in the right areas of growth. So I think the whole effort in managing information here has been stepped up a notch.

Gerry Heffernan – Lord Abbett

Well, Paul, those are some of the things that I want to hear, because I mean honestly kudos to you guys for breaking above the dollar per share mark in earnings that was -- it's been a long hard fight. And but I'll tell you, I would have never thought the price would have been -- the share price of the stock would have been at this level given the fact that you've hit record earnings and you're above a buck a share.

So obviously, there's some other parts of your business that the market still has expectations for and I think at this point that you've gotten pretty much all of the targets knocked off except the target where you guys are probably historically best at which is furthering your product growth, furthering your market growth and the sales line. So we're very -- I'm very anxious to see how you guys attack new business?

Paul Meringolo

We're going to be relentless from that end.

Gerry Heffernan – Lord Abbett

Very good. Look forward to speaking further.

Paul Meringolo

Thanks, Gerry.

Gerry Heffernan – Lord Abbett

Thanks.

Operator

(Operator Instructions) There are no further questions.

Paul Meringolo

Well, thank you all for participating. We look forward to seeing you, if you choose to come to our annual shareholders meeting and we'll continue to communicate with you on a regular basis. Thanks and have a great day. Thanks, Salina.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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